OSFI - Stress Testing Flashcards

1
Q

What is the purpose of stress-testing? (4)

A

Risk: risk identifications & control (stress testing helps identify and control risk)
Complement: stress testing complements other risk management tools such as Best’s Capital Adequacy Ratio + simulate shocks
Cap: stress testing supports capital management
Liquidity: stress testing improves liquidity management

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2
Q

Definition of stress testing.

A

A risk management technique TO EVALUATE the effects on financial condition of specified changes CORRESPONDING TO exceptional but plausible events.

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3
Q

Describe - risk ID, control (regarding purpose of stress testing)

A

Risk ID: identify concentrations & interactions of risk

CONTROL: adjust individual portfolios, overall business strategy

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4
Q

Describe - complement other tools (regarding purpose of stress testing)

A
  • test statistical models USED to determine VaR

- simulate SHOCKS to test models robustness to economic changes

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5
Q

Describe - supporting Capital Management (regarding purpose of stress testing)

A

Identify SEVERE events and/or COMPOUNDING events that impact capital requirements.

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6
Q

Describe - improving Liquidity Management (regarding purpose of stress testing)

A

ASSESS liquidity profile & adequacy of buffers FOR institutional & market-wide stresses.

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7
Q

Describe board versus management responsibilities regarding a stress testing program. (3 each)

A
BoD:
- Ultimate responsibility for program
- ensures management implementation of program
- should be aware of key findings
Management:
- implementation of program
- management of program
- planning for PAS (Plausible Adverse Scenario)
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8
Q

List the 4 Rudimentary stress-testing considerations.

A
  • Range of perspectives and techniques
  • Update stress testing framework regularly
  • Documentation
  • Infrastructure
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9
Q

Describe the rudimentary stress-testing consideration: Range of perspectives and techniques. (2)

A

Range of perspectives and techniques:

  • perspectives: consult economists, actuaries, others
  • techniques: qualitative, quantitative
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10
Q

Describe the rudimentary stress-testing consideration: Update stress testing framework regularly. (2)

A

Update stress testing framework regularly:

  • monitor EFFECTIVENESS of framework with qualitative and quantitative measures & UPDATE accordingly
  • elements of a framework includes: documents, data quality, assumptions, …
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11
Q

Describe the rudimentary stress-testing consideration: Documentation.

A

Documentation:

- provide written docs of assumptions, methods & fundamental elements of scenarios

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12
Q

Describe the rudimentary stress-testing consideration: Infrastructure. (3)

A

Infrastructure:

  • the framework should be flexible
  • should allow increase in SENSITIVITY TESTING in times of rapid change
  • should accommodate TIME HORIZONS for management action
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13
Q

How to improve stress testing.

A

Rudimentary considerations, including making risks dynamic and reviewing assumptions more than once a year
- focus on PROGRAM, not just scenarios

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14
Q

Considerations in scenario selection. (3)

A
  • scenarios should cover all important BUSINESS & PRODUCT lines
  • create NON-HISTORICAL scenarios (events that haven’t happened by COULD happen)
  • severe & sustained DOWNTURNS (includes large losses, loss of reputation, legal problems, etc.)
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15
Q

Focus areas in response to financial market turmoil. (5)

A
  • Risk Mitigation
  • S&W (Securitization & Warehousing)
  • Reputational Risk
  • Credit Risk & Counterparty Risk
  • Concentration Risk
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16
Q

OSFI’s consideration in assessing stress-testing program. (4)

A
  • APPROPRIATENESS: are scenarios appropriate for institution’s risk profile?
  • VIABILITY: are scenarios included that compromise viability?
  • FREQUENCY: is stress testing frequent enough for timely management action?
  • SEVERE SHOCKS: do scenarios include severe shocks, sustained downturns?
17
Q

Describe and contrast scenario with sensitivity testing. (3 each)

A
SCENARIO testing:
- significant changes to risk factors
- observe future state including ripple effect & management actions over a long time horizon
- more complex & comprehensive
SENSITIVITY testing:
- incremental changes to risk factors
- shock is more immediate & time horizon shorter
- simpler, fewer resources required